Vulnerability of tax revenue in resource-rich countries

Christian von Haldenwang* & Maksym Ivanyna**

Affiliations:
*Christian von Haldenwang
(corresponding author)
German Development Institute (Deutsches Institut für Entwicklungspolitik, DIE)
Tulpenfeld 6
53113 Bonn
Germany
Christian.vonHaldenwang@die-gdi.de
Tel: +49 (0) 228-94927 282

** Maksym Ivanyna
Joint Vienna Institute
mivanyna@jvi.org

Abstract: Conventional wisdom has it that natural resource dependence is associated with
increased vulnerability to external shocks emanating from sudden supply and demand
changes in the global economy. This paper explores to what extent government revenue in
low- and middle-income countries is affected by different kinds of shocks and whether these
effects are different for resource-rich as compared to non-resource-rich countries. Based on
data from 176 countries between 1980-2010, we measure the elasticity of tax revenue in
resource-rich countries with respect to two kinds of shocks: exchange rate pressure and
terms of trade shocks. We find that government revenue in resource-rich countries is more
volatile, but not necessarily more vulnerable, in particular with regard to terms of trade
shocks. Poorer resource-rich countries are more vulnerable than their higher-income
counterparts. Vulnerability in resource-rich countries has significantly decreased in the
2000s as compared to previous decades. Introducing institutional variables such as political
regime type or bureaucratic quality we find that the general institutional characteristics of a
country may not always reflect the quality of its management of natural resources. Still,
results provide some support to those arguments that stress the relevance of good
governance in the context of the so-called “resource curse”.

Keywords: Taxation, Vulnerability, Political regimes, Democracy, Natural Resources,

Resource Curse, Shocks

Acknowledgements: This paper is partly based on a broader study on the vulnerability and
resilience factors of tax revenues in developing countries (von Haldenwang et al., 2013). Co-
authors of the study are Oliver Morrissey, Ingo Bordon and Armin von Schiller. Financial
support of the European Commission is gratefully acknowledged.

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 Vulnerability of tax revenue in resource-rich countries

1. Introduction
Conventional wisdom has it that countries with a high dependence on natural resource
exports are particularly vulnerable to exogenous shocks. Their economies usually depend on
a small range of export products with oscillating world market prices, making public revenue
from these sources highly volatile. In addition, abundance of natural resources often leads to
the crowding-out of investments in other sectors (the famous ‘Dutch disease’), resulting in
small tax bases.
But is this conventional wisdom corroborated by empirical findings? To be sure, a broad
body of literature links abundance of natural resources to volatility of growth and revenue
(Crivelli and Gupta, 2014; IMF, 2013). But volatility does not equal vulnerability. In this
paper, ‘volatility’ is taken as a measure of revenue instability, based on deviations around an
observed (linear or exponential) trend. ‘Vulnerability’ refers to the elasticity of tax revenue
with respect to different kinds of exogenous shocks. Concerning the latter, empirical
research is rather scarce, especially with regard to developing countries.
In theory, resource-rich countries that are able to deal with volatile revenue sources through
sound macroeconomic and fiscal management could be even less affected by external
shocks than other countries. Or, put the other way round: High revenue vulnerability of
resource-rich countries could also depend on other, including domestic, factors, such as for
instance wide-spread rent-seeking, corruption, limited state capacity (Thies, 2010) or
economic mismanagement (Raddatz, 2007). To give an example, government revenue from
mining in Zambia has oscillated between 5 and 18 per cent between 2002 and 2011, while at
the same time the average government revenue take compared to the contribution of
mining to GDP was less than a fifth of the ratios obtained by international benchmark
countries such as Chile or Botswana. Zambia’s poor performance has been linked to political
instability and a critical lack of state capacity in the management of the mining sector
(Lundstøl et al., 2013).
Hence, the first puzzle this paper sets out to explore is whether natural resource
dependence is associated with increased vulnerability to external shocks. We are particularly
interested in the fate of poorer countries, as it can be supposed that they will find it more
difficult to implement the sound policies mentioned above. The second puzzle analysed in
the paper refers to the influence of governance factors on vulnerability. Following the
resource curse literature we expect political regime type and state capacity to impact on the
way governments deal with resource wealth (Andersen and Ross, 2011; Collier and Hoeffler,
2009; Davis, 2013; Ehrhart and Guerineau, 2013; Haber and Menaldo, 2011; Liou and
Musgrave, 2012; McGuirk, 2013; Ross, 2012a; Schaffer and Ziyadov, 2012; Wright et al.,
2014).

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The paper explores the effect of two kinds of shocks on tax revenue in a total of 176
countries – the exchange rate pressure index, a proxy for export demand and foreign capital
flows shocks, and terms-of-trade shocks. It compares resource-rich (RR) and non-resource-
rich (non-RR) countries1 regarding their revenue volatility and exposure to shocks. Further, it
analyses whether countries behave differently according to income levels, political regime
type and government effectiveness.
We find evidence that revenues of RR-countries are indeed more volatile than those of non-
RR countries. They also face more volatile shocks – in particular with regard to terms of
trade. Looking at the impact of shocks, however, a differentiated picture emerges. RR
countries are not necessarily more vulnerable to external shocks. While exchange rate
pressure affects RR countries more than non-RR countries, the effect is driven above all by
poorer (low- and lower-middle-income) countries. With regard to terms-of-trade shocks, RR
and non-RR countries are equally vulnerable and in both groups, revenues of poorer
countries are more affected by this kind of shock. We also observe that RR as well as non-RR
countries reduce the vulnerability of their revenue to terms-of-trade shocks in the 2000s,
compared to the previous two decades. In the case of RR countries, this could be the result
of a general improvement of resource management.
Finally, the introduction of governance-related indicators produces mixed results. For
instance, democracies appear to fare better facing exchange rate pressure shocks than non-
democracies in RR countries, whereas results are inconclusive for non-RR countries. In
contrast, terms-of-trade shocks seem to affect countries independently of their governance
structure. The results suggest that the low quality of governance in general does not
necessarily translate into poor governance of the resource sector, which is a major source of
public revenue in resource-rich countries.
The paper proceeds as follows: The next section develops the argument based on a
discussion of the literature on shocks, revenue volatility and natural resources. Section 3
introduces the method and data used. Section 4 presents the findings of the econometric
analysis. Section 5 concludes.

2. Literature review
The impact of natural resources on the volatility of economic growth is a well-established
fact (for developing countries, see for instance Arezki et al., 2012). Many observations point
to a strong relationship between volatility and vulnerability. For instance, in a recent study
on managing volatility, the International Monetary Fund observes: “research suggests that
external shocks contribute to large output losses and protracted growth slowdowns in LICs”
(IMF, 2013: 7). The IMF paper continues: “A number of LICs face fragilities defined by their
weak institutions, ongoing or recent conflict, and high poverty levels, which put them in a
weak position to cope with the effects of shocks and to mediate their social impact. [...] Such

1
To identify RR countries we rely on the categorisation introduced by the IMF (2012). For a list of RR
countries included in the analysis please refer to the Appendix.

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underlying structural and policy vulnerabilities could limit their capacity to absorb future
external shocks, including through countervailing policy measures” (ibid., 8).
Contributions to the debate on revenue volatility or vulnerability in developing countries
often refer to the “resource curse” (for instance, see Collier and Venables, 2008; Ehrhart and
Guerineau, 2013; Frankel, 2010; Humphreys et al., 2007; Ross, 2012b; van der Ploeg and
Poelhekke, 2008; van der Ploeg and Venables, 2012). Economically, large inflows of foreign
currency from the export of natural resources lead to domestic currency appreciation and
reduce competitiveness, investment and productivity growth in other sectors (the famous
“Dutch disease”). In addition, price fluctuations in world markets make it more difficult to
plan major investment projects and medium-term government budgets, as dependence on a
few export products increases the vulnerability of public revenue systems to changes in the
terms of trade (Araki and Claus, 2014; Loayza and Raddatz, 2007). Furthermore, in the
absence of competition the state’s acquisition of the resource rent often leads to
inefficiencies, which have an adverse effect on the development of the resource sector itself.
As a result, these countries tend to have a small tax base, and public revenues depend on
sources that are more volatile than others (such as non-tax revenue from state-owned
enterprises, for instance). States may escape the volatility-vulnerability nexus mainly by
saving a part of the resource rent for countercyclical spending activities and by investing in
the diversification of the economy (Gelb and Grasmann, 2010). In an analysis of 44 countries,
including 14 oil exporters, Buetzer et al. (2012) show that oil price shocks do not necessarily
lead to exchange rate appreciation, as oil exporters tend to counter appreciation pressure by
accumulating foreign exchange reserves.2
Some papers point to changes over time in this relationship. Ebeke and Ehrhart (2011)show
that tax revenue instability (measured as the standard deviation of the log difference)
remains high in sub-Sahara African countries but has declined from a peak in the late 1980s
as the tax composition changed. Taxes on corporate income and trade tend to be the most
unstable, so the gradual decline in overall tax instability is attributed to increased shares of
relatively more stable indirect taxes. Tax instability tends to increase with instability of GDP,
less consistently with dependence on natural resource rents, and in some specifications is
lower in countries with higher trade openness (the trade volume measure) and per capita
GDP (Ebeke and Ehrhart, 2011, Table 5). In a similar vein, Adler and Tovar (2012) observe
lower levels of vulnerability to global financial shocks in Latin America and Asia over the last
15 years. Though limited, this is further evidence that instability is associated with exposure
to exogenous shocks and related to the composition of revenue (see also Kaminsky, 2010).
The relationship becomes more complicated, however, once governance factors are taken
into consideration. It is here that the political dimension of the resource curse kicks in. Two
factors account for it. First, a society derives revenue from the resource sector in the form of
rents and so (to some extent) independently of its own efforts. This paralyses personal
initiative, creates disincentives for domestic revenue mobilisation and weakens the

2
It should be noted, however, that the sample consists mainly of high- and upper-middle-income countries.

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monitoring of authorities in the institutional set-up (Hendrix and Noland, 2014). At the same
time, rents from natural resources can also be spent on state capacity – for instance, by
building up a strong military and police apparatus. Second, the revenue goes primarily to the
state, who distributes the bounty. Control of the state becomes an ‘all-or-nothing’ game if
very few profitable activities are possible outside the public sector.
As a result, resource-rich countries often have inefficient or ‘unbalanced’ administrative
structures. They are frequently plagued by distributive, resource-related conflicts and are
also, on average, less democratic than resource-poor countries with comparable per capita
incomes. Hence, the political resource curse impacts on (i) political regime type, (ii) state
capacity and (iii) the incidence of civil conflict.
Several empirical studies explore the relationship of natural resource wealth and these
dimensions. Some test the argument that rents from natural resources – in particular, from
oil – affect the quality of political regimes or the chances of democratization. Key
contributions to this debate have been made by Ross (2001; 2012a; 2014) who finds robust
evidence on the stabilising effect of resource wealth on autocratic rule. This is in line with
the theoretical arguments and empirical findings presented by other authors (Collier and
Hoeffler, 2005; Hendrix and Noland, 2014; Tsui, 2011; Wright et al., 2014) and it has recently
been corroborated by Prichard et al. (2014) who use a new dataset with more detailled
information on natural-resource-based versus non-resource-based revenue.3
Still, it is unclear how this dimension of the resource curse should affect the vulnerability of
revenue to external shocks. There are no compelling theoretical arguments supporting the
assumption that resource-dependent autocracies would be somehow more exposed to
external shocks than resource-dependent democracies. Hence, we would not expect regime
type to have a major impact on the vulnerability of revenue in resource-rich countries.
Another line of research aims at testing the hypothesis that natural resource abundance has
a negative effect on state capacity, mainly in terms of weak institutional checks and balances
and high levels of corruption. For instance, Collier and Hoeffler (2009) provide evidence for
an erosion of institutional checks and balances over time, due to resource rents. Sala-i-
Martin and Subramanian (2003) show that natural resource wealth has a negative effect on
institutional quality in Nigeria. Besley and Persson (2010) and Knack (2008) argue that rents
from natural resources and other sources create disincentives for leaders to invest in tax
collection. Hendrix and Noland (2014) provide initial evidence on the negative association

3
The micro-theoretical mechanisms underlying this relationship are complex and difficult to measure,
however. Introducing additional variables, various authors find that the negative effect of resource-based
revenue on democracy or democratization weakens or disappears completely. For instance, Herb (2005)
observes that other factors (region, Muslim share of the population and income levels) have stronger
effects on political regime type than the resource rent. Morrison (2009) and Liou and Musgrave (2012)
arrive at the conclusion that resource rents stabilise political regimes of any kind. In a study on 15 sub-
Saharan countries, McGuirk (2013) shows that rents from natural resources lead to lower levels of tax
enforcement, thus reducing the demand for democratic accountability. Haber and Menaldo (2011) even
report the opposite effect of resource rents, but their approach has attracted criticism pointing to
conceptual and methodological flaws (see Andersen and Ross, 2011).

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between resource rents and government effectiveness and corruption. In contrast, Thies
(2010) finds that resource abundance has a mostly positive impact on state capacity, when
the latter is measured in fiscal terms. Morrison (2009) shows that non-tax revenue increases
social spending in autocracies. Among the influencing factors discussed in the literature are
the short-term impact of windfalls (resource abundance) versus the long-term effects of
natural resource dependence, as well as the differentiated effects of point-source natural
resources versus diffuse resources (Ross, 2014; van der Ploeg, 2007; Werger, 2009). All in all,
it seems that there is no clear effect of natural resource wealth on state capacity in general.
A third dimension is the impact of natural resources on civil war and violent conflict. Smith
(2004) discusses the contrasting claims that natural resource wealth may either lead to
increased levels of (distributional) conflicts in a society, or endows political leaders with
additional resources to appease conflicts. He finds resource (oil) wealth associated with
lower levels of civil war and anti-state protests, but protest levels to be pro-cyclically related
to revenue from oil. To a certain extent, these results are echoed by Thies (2010), who does
not find robust evidence of a direct effect of resource wealth on civil war onset. In contrast,
Ross (2014) holds that oil wealth helps to trigger violent conflict in low- and lower-middle-
income countries.
To sum up, most of the available literature provides evidence on a concurrence of revenue
volatility and vulnerability against external shocks in RR-countries. However, once
governance factors are introduced in the analysis, we are presented with an analytical
puzzle: While low state capacity and increased conflict would in principle be associated with
higher vulnerability of revenue, it is by no means clear that natural resource abundance
produces these effects. In contrast, regarding the effect of natural resources on political
regime type and democratisation, evidence is much more robust, yet it does not seem to be
conceptually linked to revenue vulnerability. Unfortunately, evidence is strong where the
conceptual basis is weak, and weak where the conceptual basis is strong.

3. Methodological approach
The paper explores the impact of two different kinds of shocks on tax revenue in a broad
range of countries. We take data from 176 countries, covering the period 1980-2010. First,
we build measures of fiscal capacity and revenue volatility4 for each country to characterize
tax resilience features of the sample. These measures are regressed on a set of control
factors in order to account for structural features of the economies. In identifying the
control variables we follow the tax effort literature (for instance, see Bird, 1976; Fenochietto
and Pessino, 2013; Gupta, 2007; Tanzi, 1992; Teera and Hudson, 2004). Most of these
studies use sector shares (mainly agriculture and manufacturing) and a composite measure
of trade openness, such as the share of trade volume (imports plus exports) on GDP.
However, sector shares are less suitable for panel analysis with annual data or short period
averages, as changes are usually rather slow and follow a clear trend. Further, we assume

4
The measure of volatility used in this paper is described in Appendix 2.

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that the effect of external shocks on revenue is influenced differently by imports and
exports, as well as by the sectoral composition of trade.
Hence, we use the import/GDP ratio as an indicator of the tax base for tariffs along with
export/GDP as an indicator of the performance of major sectors in the economy. With
regard to the latter, we distinguish agriculture, minerals, fuels and manufactured exports.
Treating each type of export separately allows for differential performance of separate parts
of the economy, which may be related to external shocks and the tax structure. Thus, our
basic specification is:
Rev = f(agri_exp, min_exp, fuel_exp, manuf_exp, imports, agri_va, ln_GDP) + e (1)
Tax revenue (Rev) is measured as a ratio of GDP. A broad measure of tax revenue is
employed, including total government revenue except grants. This is the most appropriate
measure when analysing resource-rich countries, as revenue from extractive activities is
treated differently across countries, depending on the institutional arrangements.
Agricultural exports (agri_exp), mineral exports (min_exp), fuel exports (fuel_exp),
manufactured exports (manuf_exp) and imports (imports) are also measured relative to
GDP. Logged GDP per capita (ln_GDP) and agricultural value added as a share of GDP
(agri_va) are included as proxies for the level of development that is expected to reflect
improvements in administrative capacity and tax collection efficiency.
To identify the effects of shocks on tax revenue in resource-rich countries, two types of
shocks are analysed. Both shocks enter our regression as continuous variables.5
First, the ER pressure index (ER_pressure) has been widely used in the international finance
literature (see Aizenman and Hutchison, 2012; Berg and Patillo, 1999; Buetzer et al., 2012;
Candelon et al., 2010) to assess the impact of foreign capital flows shocks and export
demand shocks. It is generally defined as a weighted average of percentage changes of
policy variables in response to current account or financial account shocks. We use the
following definition:
(2)

where i identifies the country, t is the year, E is the exchange rate in local currency units per
USD, RES – size of reserves, and are country-specific weights:
. Here is the standard deviation of in country i in 1980-2012,
is the same for .

The logic behind the index is that in response to an adverse balance-of-payment shock a
country could employ different strategies: the government could devaluate the currency,

5
We also check for possible non-linear effects when the magnitude of shocks is particularly large. For each
shock X, we define a dummy variable “X, large”, which is equal to 1 if a shock is greater than the 90th
percentile of the respective income group distribution. See IMF (2013) for a similar approach. However, we
find no evidence for non-linear effects of shocks on revenue. See von Haldenwang et al. (2013) for more
details.

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but it could also use its international reserves to defend the exchange rate. Both policy
variables should be considered in measuring the magnitude of external shocks. 6
We expect tax revenue in countries with developed capital and financial markets to be more
vulnerable to ER pressure. Capital outflows affect above all the financial sector and those
companies that are able to borrow abroad. These sectors typically pay larger shares of
personal and corporate income taxes. At the same time, countries with sound and credible
policies (e.g. countries with higher bureaucratic quality or countries with political regimes
that enjoy more trust from the markets) are expected to be less vulnerable to ER pressure.
For instance, the effect of capital outflows on the economy, and on financial intermediation
in particular, is much stronger if a country’s financial markets are not properly regulated.
The other shock that we use is the terms-of-trade index (ToT) - scaled as the unit-price of
imports divided by unit price of exports.7 The factor that likely increases vulnerability of
government revenue to this shock is the reliance of tax system on trade taxes. Economies
that are not sufficiently diversified and unable to quickly reorient their exports according to
price changes, are also expected to be more vulnerable. Some countries may reduce their
vulnerability to ToT shocks by establishing insurance mechanisms against these shocks. For
instance, a number of resource-rich countries follow a fiscal rule, by which they save extra
revenue in a stabilization fund when times are good, and then use revenue from the fund
when times are bad. Countries with access to (and trust of) international capital markets
may protect themselves against ToT shocks by adjusting their borrowing needs.
In order to identify the sign and the magnitude of the effect that a shock has on tax revenue,
we use a fixed effects panel estimation:
(4)

where i is the country index, and t is the year index; rev is total revenue without grants (as
percentage to GDP); w is external shock - ToT or ER_pressure X is the vector of our controls
– agriculture exports, mineral exports, fuel exports, manufactured exports and imports,
agricultural value-added and GDP per capita.  is a random error. Our interest is β. For any
variable a, ä denotes its time-demeaned value:

6
The weights in (2) are country-specific and chosen so that the more volatile series gets smaller weight. To
reduce the impact of outliers, the ER pressure index is transformed as follows:

7
In addition to these two shocks, we check for GDP decline as a proxy for a general output shock and for
intensity of natural disasters, a measure based on people killed and affected by natural disaster in every
year t and every country j (Fomby et al., 2009). With regard to GDP decline, all coefficients are statistically
insignificant and very close to zero. These results indicate that on average tax systems are neutral, i.e. the
elasticity of revenue with respect to output is close to 1. With regard to natural disasters, we find that RR
countries face less severe natural disasters shocks than non-RR countries, and their revenues are not
significantly affected by them. The reason could be that extractive industries – the main sources of revenue
in RR countries – are usually less affected by natural catastrophes than other types of economic activity,
such as for instance agriculture. For a more in-depth analysis of these relationships, see von Haldenwang et
al. (2013).

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 (5)

In analyzing the effect of shocks on revenue we account for the level of welfare using the
World Bank country income groups and dividing the sample in high- and upper-middle-
income countries (the “richer” countries) on the one hand, and lower-middle- and low-
income countries (the “poorer” countries) on the other hand.
As an additional focus we explore the behaviour of resource-rich vs. non-resource-rich
countries in different time periods – in particular before and after the year 2000. This follows
the idea that many resource-rich countries were able to improve their management of the
extractive sector in recent years, partly due to the long commodity supercycle and the
lessons learnt from previous decades.
We then divide the sample according to governance characteristics, in order to tease out
possible effects of the “political resource curse”. First we split countries according to their
political regime characteristics, based on their Polity IV score: On a scale ranging from 10 to -
10, a country is considered a democracy if its Polity IV score is higher than 5, and a non-
democracy if otherwise (see Marshall et al., 2010). As a second measure we use the
bureaucratic quality index from the ICRG data set.

4. Findings
Our findings show that the revenue structure of resource-rich countries, though more
volatile than that of non-resource-rich countries due to a higher dependence on non-tax
revenue, could be less vulnerable to external shocks. At least, there is no robust evidence
pointing to volatility of revenue from natural resources being directly connected to
increased vulnerability vis-à-vis external shocks.

Government Revenue Volatility and Shocks

Table 1 provides a summary of government revenue volatility and size of shocks in RR and
non-RR countries. Several conclusions can be drawn from the table.

(Table 1 around here)

First, as indicated by higher mean values, government revenue is on average more volatile in
RR countries. This is true for the whole sample of 1980-2010, as well as for the 1980s, 90s,
and 2000s separately. The difference in the volatility index between RR and non-RR
countries is largest in the 2000s (14.3 vs. 5.22), and smallest in the 90s (9.47 vs. 5.71).
Second, RR countries seem to be more heterogeneous, as indicated by the higher standard
deviation of the volatility index, as well as the spread between the 10th and 90th percentiles
of the index distribution. Again, the heterogeneity among RR countries is largest in the

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2000s, and smallest in the 90s, whereas the heterogeneity among non-RR countries is
roughly stable throughout 1980-2010. Yet, of 37 RR countries for which government revenue
data are available both for the 90s and the 2000s, almost two thirds (24) managed to reduce
their volatility in the 2000s, whereas for some countries (in particular, Cameroon,
Madagascar, Niger) the situation deteriorated significantly.8
The difference in average government revenue volatility between RR and non-RR countries
could be a result of two factors. First, RR countries may be exposed to more volatile external
conditions. Second, government revenue in RR countries may be more sensitive to external
shocks due to other, including domestic, reasons. These two factors can commingle and
work in the same direction, or they can offset each other.
As shown in Table 1, RR countries do face more volatile external shocks, especially with
regard to terms of trade. The standard deviation of ToT shocks to RR countries is 0.38 in
1980-2010, whereas for non-RR countries it is considerably lower (0.23). To illustrate, one
standard deviation ToT shock in a non-RR country means a change of import-export unit
price by 26 per cent, whereas in a RR country the change is 46 per cent.9 RR countries also
face somewhat more volatile exchange rate pressure shocks, but the difference between RR
and non-RR countries is not that large in this case. For example, one standard deviation ER
pressure shock in a non-RR country implies a change of exchange rate by 9 per cent
(assuming international reserves are fixed). In a RR country a similar shock implies a change
of exchange rate by 12 per cent.
Compared to the previous decades, the difference in volatility of ToT shocks between RR and
non-RR countries is higher in the 2000s, which is consistent with the fact that the difference
in total government revenue volatility is also higher in this period. At the same time, two
thirds of RR countries improved the stability of their government revenue despite an
increased volatility of shocks. This suggests that tax systems in RR countries may be less
sensitive to external shocks then those in non-RR countries.

Regression Results: Pre-defined Groups

Table 2 reports our estimation results for exchange rate pressure (ER) and terms of trade
(ToT) shocks. For each shock we run fixed-effects regressions on all countries, and on RR and
non-RR countries separately. Within each group, we also report the results separately for
higher- and lower-income countries. All standard errors are clustered by country.

(Table 2 around here)

8
This may be related to greater dependency of these countries to natural resources in the 2000s.
9
Note that the terms-of-trade shocks are in logarithms.

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Looking at the whole sample we find that both shocks are significantly associated with lower
revenue. The relationship is similar for higher-income and lower-income countries, although
for ToT shocks the magnitude of the effect is clearly lower for the group of richer countries.
RR countries seem to be more sensitive than non-RR countries to ER pressure shocks. The
result is driven by the sensitivity of lower-income RR countries, whereas for the higher-
income RR countries the sensitivity is not significant in statistical terms. Interestingly, the
situation is diametrically opposite for non-RR countries. In this group the revenues of richer
countries are more sensitive to ER pressure shocks, while the effect for the poorer countries
is essentially zero.
The difference may be explained by looking at the most plausible causes of ER pressure. In
the non-RR group the difference between higher- and lower-income countries arises most
likely because the richer economies, in particular their financial markets, are more deeply
integrated and, thus, more exposed to the international capital flows. Hence, capital
outflows may substantially affect revenue-generating sectors in the higher-income group.
The same is likely to be true in lower-income RR countries. They usually enjoy higher
confidence of the capital markets (though probably confined to the extractive sectors) then
their non-RR counterparts, many of which are hardly integrated at all in the world financial
markets. Lower-income RR countries are also less likely to have enough institutional capacity
to withstand capital flows volatility. Higher-income RR countries are less sensitive to ER
pressure most likely because they rely less on tax revenue from the sectors directly related
to the external capital flows. In addition, they should be in a better position to counteract
the effect of shocks through fiscal and monetary policies. Our findings thus corroborate the
results reported by Buetzer et al. (2012) on the behaviour of commodity exporters facing
external demand shocks.
ToT shocks have a negative impact on government revenue for the whole sample, but
looking at the RR and the non-RR groups separately we find that the effect is stronger and
statistically significant for lower-income countries, independently of their endowment with
natural resources. Higher-income countries in both RR and non-RR country groups appear to
be less sensitive then their lower-income counterparts.
As discussed above, RR countries face more volatile terms-of-trade shocks. However, Table 2
shows that all in all RR countries are not more sensitive to these shocks. Rather, we observe
a smaller sensitivity of RR lower-income countries.
The lower sensitivity of richer countries can be explained by the fact that most countries in
this group do not rely heavily on trade taxes. In contrast, RR countries, both higher- and
lower-income, do often rely on trade taxes (e.g. export duties on hydrocarbons). Besides,
revenues from other sources – royalties, fees, profits from state-owned enterprises – also
depend on commodity prices. Yet, lower-income RR countries are less directly reliant on
terms-of-trade developments. This is most probably because the tax instruments of RR
countries include items which are less elastic with respect to export-import prices, above all
royalties and other license fees.

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Looking at the effect of sectoral exports we find that governments in richer RR countries are
clearly in a better position to cream off revenues from mining, drilling and manufacturing.
Mineral exports appear to be associated with higher tax revenue in the higher-income
countries, while the results for the lower-income countries are negative and statistically
significant. Fuel exports are positively related to revenue in the whole sample and in the RR
group, as could be expected. The differentiated impact of minerals and fuels shows, once
again, that it is easier for resource-rich countries to collect rents from drilling compared to
mining. The effect of manufacturing is mostly negative, with the exception of the higher-
income RR countries. This latter result could be due to longer value chains in the extractive
industries in these countries.
Governance indicators
In the next exercise we explore the effects of both shocks in different subgroups of RR and
non-RR countries. First, we divide the sample according to political regime – democracies vs.
non-democracies. Several studies suggest that the revenue systems of democratic regimes
could be more resilient vis-à-vis external shocks (Ehrhart and Guerineau, 2013; von
Haldenwang et al., 2013).

(Table 3 around here)

When accounting for natural resource endowments, however, the results fail to provide
clear evidence for a better performance of democracies. Owing perhaps to small sample
size, evidence is indicative at best and could be driven by outliers – at least in the group of
16 RR democracies. For RR countries, findings point to a lower sensitivity of democratic
regimes with regard to ER pressure shocks. In contrast, the point estimates of the effects of
ToT shocks on government revenue are higher for democratic regimes.
Looking at non-RR countries, there is no evidence of differentiated patterns for democratic
or non-democratic regimes. It appears noteworthy, however, that the difference between
the political regimes is not very large, and about the same in RR and non-RR countries. On
the one hand, in non-RR countries tax effort and trust in government are likely to matter
more for revenue collection and the fight against tax evasion, which makes political regime a
more relevant indicator for fiscal performance in these countries. On the other hand,
transparency and accountability of revenue collection from extractive activities could matter
in RR countries as well. As shown by other studies (see Garcia and von Haldenwang, 2015),
stable autocratic regimes may be as efficient in collecting taxes as democratic governments.
The second subgroup division that we consider is by time period – 1980-2000 vs. 2001-2010.
The results are presented in Table 4. Again, results mostly fail to reach statistical significance,
but the picture that emerges is that RR countries managed their government revenue better
in the 2000s than in the earlier period – the effects of exchange rate pressure and terms-of-
trade shocks are essentially zero in 2000s. This may be the result of a general improvement

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of resource management in RR countries. In some countries transparency of fiscal regimes
improved (for instance, Kazakhstan and Azerbaijan switched from classified discretionary
contracts for each new oil well to open legislature). Many countries implemented fiscal rules
that would deal with the volatility of commodity prices (for instance, Chile, Norway, Russia,
Nigeria, Mongolia). The situation is similar in non-RR countries, but only for terms-of-trade
shocks, not for exchange rate pressure.

(Table 4 around here)

We also divide countries by the quality of their public sector (based on the bureaucratic
quality index of ICRG). Results are presented in Table 5. As it appears, bureaucratic quality
seems to be more relevant for the resilience to ER pressure shocks than to ToT shocks. Table
5 shows that in the RR group ToT shocks affect tax revenue in high bureaucratic quality
countries more than in countries with low bureaucratic quality. However, the result may
once again be driven by outliers, as there are only ten RR countries with high bureaucratic
quality in our sample. For non-RR countries low bureaucratic quality generally makes
countries less resilient to external shocks, judging from the magnitudes of the coefficients,
but only the group with low bureaucratic quality produces statistically significant results. All
in all the results seem to reflect the ambiguous nature of empirical findings regarding the
effect of natural resource wealth on administrative capacity, reported in Section 2 of this
paper.

(Table 5 around here)

5. Concluding remarks
Countries rich in natural resources tend to suffer from higher degrees of revenue volatility,
but this is not always a consequence of their exposure to exogenous shocks. Of the two
kinds of shocks we have analyzed in this paper – exchange rate pressure and terms-of-trade
shocks – the former seems to affect both RR and non-RR countries, albeit differently. Among
the RR countries, those belonging to the lower income group are more vulnerable than the
higher-income countries. At the same time, RR countries (especially the poorer ones) appear
to be less affected by ToT shocks.
This finding is even more interesting as the shocks themselves are more volatile for RR
countries than for non-RR countries. The standard deviation of both shocks – and of ToT
shocks in particular – is higher for RR countries. In this regard conventional wisdom appears
to be corroborated by the facts: Countries with a high dependency on natural resources face
higher oscillations of world market prices, on average. Somewhat surprisingly, however, we

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find that the difference between RR and non-RR countries is highest in the 2000s, compared
to the previous two decades, but the vulnerability of government revenue to shocks in RR
countries is lower in the 2000s, indicating higher levels of management performance.
Is the character of the political regime associated with the vulnerability of government
revenue in RR countries? Our findings show that non-democratic regimes could indeed be
more vulnerable to ER pressure shocks, while results are inconclusive with regard to ToT
shocks. A different picture emerges when looking at bureaucratic quality: Here we find that
low bureaucratic quality matters more for non-RR countries. At the same time, some
findings suggest that RR countries with higher levels of governance in terms of political
regime and state capacity could in fact be more vulnerable to ToT shocks, perhaps due to
higher degree of world market integration and reliance on external borrowing as an
insurance mechanism.
Overall, the somewhat fuzzy picture of the effect of governance factors in RR countries can
be explained by the fact that revenue from natural resources is often easier to collect and
control than revenue from other sources. This is especially true for drilling (oil and gas), less
for mining. Autocratic and corrupt governments could even have some additional levers to
extract revenue from resource industries in bad times. Lastly, low governance levels in
general do not necessarily mean bad resource management – some countries may perform
poorly in almost all public policy areas, but are still highly effective in collecting revenues
from the extractive industries. In this sense, our findings are in line with the existing
literature on the political resource curse.

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Appendix

1. List of countries coded as resource-rich

Afghanistan, Albania, Algeria, Angola, Bahrain, Bolivia, Botswana, Brunei Darussalam,

Cameroon, Central African Republic, Chad, Chile, Congo, Rep., Cote d'Ivoire, Ecuador,
Equatorial Guinea, Gabon, Ghana, Guatemala, Guinea, Guyana, Indonesia, Iran, Iraq,
Kazakhstan, Kyrgyz Republic, Lao PDR, Libya, Madagascar, Mali, Mauritania, Mexico,
Mongolia, Mozambique, Niger, Nigeria, Norway, Oman, Papua New Guinea, Peru, Russian
Federation, Sao Tome and Principe, Saudi Arabia, Sierra Leone, Syrian Arab Republic,
Tanzania, Timor-Leste, Togo, Trinidad and Tobago, Turkmenistan, United Arab Emirates,
Uzbekistan, Venezuela, Vietnam, Yemen, Zambia.

2. Measuring volatility

Volatility of tax revenue is measured by specifying the trend equation:

where y is the variable whose level of instability we want to find, t is time, and et is the
residual at time t. To obtain the index we use the formula:
n
 yt  yˆt 
2
100 t1
(I)
y n3

where y is the arithmetic mean of y, y t is the observed value of y in year t and yˆ t is the
estimated value of y, from (2), in year t. The square root term in (I) yields the standard
deviation of residuals from a quadratic time trend, as the mean of the residuals is necessarily
zero. This is divided by the arithmetic mean of y to normalise the index, enabling cross-
country comparisons to be made. The variable t2 is included in the time trend to pick up
possible non-linearities. The index is to be interpreted as the typical deviation of the variable
from a quadratic time trend over the period. As such it records average volatility over this
period.

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Tables:

Table 1: Revenue volatility and size of shocks in RR and non-RR countries, by decade
Total Government Exchange Rate
Terms of Trade
Revenue Volatility Pressure
Non-RR RR Non-RR RR Non-RR RR
1980-2010
Mean 7.91 17.03 -0.16 -0.17 -0.02 -0.13
Standard deviation 6.20 18.46 2.21 2.46 0.23 0.38
10th percentile 2.49 5.70 -2.90 -3.19 -0.25 -0.63
90th percentile 13.47 46.15 2.78 3.13 0.20 0.23
Observations 117 51 3082 1280 2298 1190
1981-1990
Mean 7.51 12.00 0.33 0.58 -0.08 -0.25
Standard deviation 10.23 13.96 2.37 2.57 0.36 0.42
10th percentile 1.90 2.47 -2.93 -3 -0.54 -0.81
90th percentile 13.28 27.52 3.16 3.59 0.29 0.26
Observations 58 16 863 353 508 290
1991-2000
Mean 5.63 9.56 0.21 0.24 -0.04 0.05
Standard deviation 4.47 6.14 2.18 2.45 0.15 0.31
10th percentile 1.53 3.26 -2.68 -3.09 -0.2 -0.23
90th percentile 11.43 18.14 2.82 3.16 0.12 0.45
Observations 101 35 1048 431 572 325
2001-2010
Mean 4.83 12.78 -0.84 -1.06 0.02 -0.17
Standard deviation 3.44 17.14 1.92 2.08 0.16 0.34
10th percentile 1.49 2.81 -2.98 -3.3 -0.13 -0.59
90th percentile 8.92 49.61 2.05 2.14 0.2 0.1
Observations 102 48 1171 496 1170 550
Note: RR = resource-rich

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Table 2: Effect of shocks on government revenue: Exchange rate pressure and terms of trade

(1) (2) (3) (4) (5) (6) (7) (8) (9)

all all all RR RR RR non-RR non-RR non-RR
all HIC/UMIC LIC/LMIC all HIC/UMIC LIC/LMIC all HIC/UMIC LIC/LMIC
VARIABLES rev rev rev rev rev rev rev rev rev

ER pressure shock -0.134*** -0.159** -0.115** -0.160* 0.174 -0.192* -0.0984** -0.175** -0.0335
(0.0419) (0.0651) (0.0539) (0.0883) (0.172) (0.107) (0.0474) (0.0692) (0.0625)
ToT shock -4.404*** -2.469*** -4.625*** -4.221*** -2.286 -3.388** -4.311*** -1.445 -4.786***
(0.481) (0.771) (0.626) (1.062) (2.177) (1.467) (0.658) (1.201) (0.767)
agr_exp_togdp -0.0312 0.0135 -0.00543 0.236** 0.0267 0.149 -0.0855*** -0.125*** -0.0972**
(0.0283) (0.0417) (0.0413) (0.103) (0.489) (0.110) (0.0290) (0.0420) (0.0437)
min_exp_togdp -0.0489 0.102 -0.142** 0.0235 0.217 -0.194** 0.0390 0.266* -0.221
(0.0542) (0.0924) (0.0667) (0.0790) (0.159) (0.0961) (0.0989) (0.139) (0.140)
manuf_exp_togdp -0.0623*** -0.0220 -0.122*** 0.144* 0.426*** -0.112 -0.111*** -0.158*** -0.117***
(0.0171) (0.0232) (0.0285) (0.0862) (0.161) (0.113) (0.0177) (0.0259) (0.0281)
imports_togdp 0.0470*** -0.0445* 0.142*** 0.0509 -0.0573 0.0948** 0.0841*** 0.0705*** 0.161***
(0.0149) (0.0230) (0.0203) (0.0396) (0.0967) (0.0439) (0.0168) (0.0265) (0.0224)
fuel_exp_togdp 0.168*** 0.132*** 0.335*** 0.317*** 0.367*** 0.348*** -0.0945* -0.274*** 0.460***
(0.0352) (0.0486) (0.0524) (0.0545) (0.0790) (0.0770) (0.0546) (0.0730) (0.0967)
agri_va_gdp -0.0486** -0.104 -0.0451* -0.163** -0.0585 -0.0327 -0.0227 0.210** -0.0469*
(0.0236) (0.101) (0.0239) (0.0676) (0.484) (0.0698) (0.0241) (0.106) (0.0241)
ln_gdp 0.230 -3.498*** 3.065*** -1.776 -8.518*** 9.823*** 0.474 0.701 0.814
(0.718) (1.195) (0.959) (1.585) (2.197) (2.608) (0.826) (1.433) (1.065)
constant 23.25*** 64.80*** -3.754 31.44*** 98.23*** -49.89*** 22.21*** 25.60* 12.47
(5.809) (11.10) (6.923) (12.05) (21.22) (17.80) (6.789) (13.30) (7.766)

R-squared 0.219 0.202 0.326 0.414 0.646 0.479 0.178 0.206 0.315
observations 1680 769 911 428 142 286 1252 627 625
Number of id 139 68 71 40 14 26 99 54 45
Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1; HIC = high-income countries; UMIC = upper-middle-income countries; LMIC =
lower-middle-income countries; LIC = low-income countries; RR = resource-rich

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Table 3: Effect of shocks on government revenue in RR and non-RR countries: Democracies
vs. non-democracies
(1) (2) (3) (4)
non-Democr. Democr. non-Democr. Democr.
VARIABLES rev rev rev rev
RR countries Non-RR countries

ER pressure shock -0.199* -0.0583 -0.0383 -0.0325

(0.117) (0.141) (0.0792) (0.0552)
ToT shock -2.478* -7.878** -4.939*** -5.034***
(1.397) (3.242) (0.906) (1.077)
agr_exp_togdp 0.161 0.504** -0.0960 -0.0380
(0.115) (0.238) (0.0818) (0.0326)
min_exp_togdp 0.0315 -0.397** -0.303* -0.198
(0.0956) (0.200) (0.159) (0.192)
manuf_exp_togdp 0.0374 0.337** -0.112*** -0.173***
(0.121) (0.145) (0.0280) (0.0298)
imports_togdp 0.0807* -0.00659 0.101*** 0.104***
(0.0438) (0.102) (0.0243) (0.0285)
fuel_exp_togdp 0.320*** 0.231** -0.261*** 0.443***
(0.0687) (0.113) (0.0704) (0.113)
agri_va_gdp -0.199** -0.0522 -0.145** 0.0297
(0.0911) (0.119) (0.0573) (0.0222)
ln_gdp 2.276 3.560 3.420** -4.472***
(2.298) (4.905) (1.355) (1.426)
constant 2.173 -6.549 -1.763 63.93***
(16.88) (38.92) (10.59) (11.94)

R-squared 0.492 0.555 0.275 0.419

observations 254 169 480 610
Number of id 33 16 45 53
Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1; ER pressure = exchange
rate pressure; ToT = terms of trade; Democr. = democratic; RR = resource-rich

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Table 4: Effect of shocks on government revenue in RR and non-RR countries: 2001-2010
vs. 1980-2000

(1) (2) (3) (4)

1980-2000 2001-2010 1980-2000 2001-2010
VARIABLES rev rev rev rev
RR countries Non-RR countries

ER pressure shock -0.188 -0.109 0.0278 -0.108**

(0.128) (0.125) (0.0799) (0.0460)
ToT shock -5.364* -0.853 -6.175*** -1.072
(3.045) (1.699) (1.179) (0.827)
agr_exp_togdp 0.0205 0.304** -0.284*** -0.0858**
(0.260) (0.125) (0.0739) (0.0337)
min_exp_togdp -0.320 0.0717 -0.246 -0.0124
(0.312) (0.110) (0.305) (0.0887)
manuf_exp_togdp 0.174 0.187 -0.112*** -0.0857***
(0.173) (0.116) (0.0341) (0.0228)
imports_togdp 0.0429 0.0251 0.0514* 0.0687***
(0.124) (0.0462) (0.0278) (0.0193)
fuel_exp_togdp 0.157 0.357*** -0.228** -0.0698
(0.126) (0.0682) (0.0955) (0.0618)
agri_va_gdp -0.343* -0.0712 -0.332*** -0.0318
(0.179) (0.0815) (0.0871) (0.0194)
ln_gdp -5.117** -5.739 -1.303 2.342*
(2.566) (3.503) (1.527) (1.243)
constant 59.58*** 60.74** 39.43*** 8.565
(19.19) (26.27) (12.15) (10.16)

R-squared 0.388 0.380 0.152 0.231

observations 149 279 486 766
Number of id 34 37 84 96
Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1; ER pressure = exchange
rate pressure; ToT = terms of trade

Electronic copy available at: https://ssrn.com/abstract=2567732

Table 5: Effect of shocks on government revenue in RR and non-RR countries: Low
bureaucratic quality vs. high bureaucratic quality countries

(1) (2) (3) (4)

Low bur. High bur.
Low bur. qual. High bur. qual. qual. qual.
VARIABLES rev rev rev rev
RR countries Non-RR countries

ER pressure shock -0.161 -0.100 -0.121** 0.00776

(0.107) (0.185) (0.0563) (0.0635)
ToT shock -3.671*** -7.155** -2.301** -0.600
(1.307) (2.936) (0.922) (1.028)
agr_exp_togdp 0.424*** -0.0289 -0.0748** 0.349***
(0.154) (0.336) (0.0314) (0.0854)
min_exp_togdp 0.0966 -0.189 -0.114 -0.0912
(0.103) (0.169) (0.133) (0.126)
manuf_exp_togdp 0.160 -0.0641 -0.147*** -0.152***
(0.116) (0.154) (0.0374) (0.0276)
imports_togdp 0.0345 -0.0675 0.138*** 0.0803***
(0.0671) (0.0843) (0.0222) (0.0270)
fuel_exp_togdp 0.394*** 0.235*** 0.140 -0.456***
(0.0723) (0.0805) (0.105) (0.0705)
agri_va_gdp -0.105 0.367 -0.00535 -0.0623
(0.0903) (0.308) (0.0223) (0.0978)
ln_gdp -1.060 -2.762 1.429 3.328**
(2.565) (4.875) (1.179) (1.455)
constant 22.32 51.04 9.626 0.795
(18.95) (41.99) (9.108) (13.37)

R-squared 0.412 0.824 0.258 0.363

observations 325 71 570 410
Number of id 30 10 42 45
Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1; ER pressure = exchange
rate pressure; ToT = terms of trade

Electronic copy available at: https://ssrn.com/abstract=2567732